At a glance
You can pay your mortgage off faster and pay less interest overall by overpaying.
Pay off more expensive debts and have an emergency fund first.
Tell your mortgage provider that overpayments need to go to paying off capital.
You can make regular or lump sum overpayments but there may be limits on what you can pay without charges.
What is a mortgage overpayment?
A mortgage overpayment is a payment you make in addition to the normal monthly payments required by your mortgage provider. Overpayments can be made in the form of a one-off lump sum or regularly through the year.
Overpaying your mortgage means there will be less interest to pay so you can pay it off sooner and reduce the overall cost of your mortgage.
For example, for some people who get paid an annual bonus or receive an inheritance, paying a lump sum off their mortgage can be a good option. Or you might choose to overpay your mortgage monthly, by paying more every month than is required.
If your payments are, say, £800 a month and you pay £850, you’re overpaying by £50 each month. But even a few pounds extra every month can make a difference over the lifetime of a mortgage.
You can also do a combination of monthly overpayments and lump sums if that works for you.
Am I eligible to make mortgage overpayments?
This will depend on your mortgage provider, your type of mortgage and the terms of the mortgage itself, so check what’s possible before you make a payment.
If you’ve got a standard variable mortgage, tracker mortgage or an offset mortgage you may be able to make unlimited overpayments without penalty – but make sure you check with your provider first.
If you've missed payments or owe charges on your mortgage you may not be able to make overpayments until these are paid off.
Can I overpay an interest-only mortgage?
You usually can make overpayments on an interest-only mortgage, but you'll need to check the terms of your mortgage to see if there are any restrictions on doing this.
Also check with your lender on how overpayments will work and the possible impact on your monthly repayments.
How much can I overpay on my mortgage?
Many lenders have a limit on how much you can overpay by each month or in a 12-month period – typically around 10% per year if you’re on a fixed-rate deal.
If you’re on a standard variable rate (SVR), you can usually overpay by as much as you want. But SVRs are expensive, so at this point you might be better off remortgaging rather than overpaying.
Some mortgage lenders charge an early repayment charge(ERC) if you overpay by more than a certain amount (often 10% of your remaining balance in a year). This can also apply if you pay off your full mortgage early.
ERCs are usually between 1% and 5% of the amount overpaid, although this can vary depending on the mortgage deal you have.
Example
Sara has a mortgage of £100,000 which allows her to overpay a maximum of 10% a year
This means she can overpay by up to £10,000 penalty-free
She chooses to overpay by £12,500
Her mortgage provider charges an early repayment penalty of 5%
Sara pays a £125 penalty (5% of £2,500.
ERCs don’t mean that you shouldn’t overpay, but you’ll need to make sure that the savings outweigh any penalties.
Always check the terms and conditions of your mortgage and speak to your lender before you make overpayments. Also make sure you understand the dates that apply. Is it a calendar year or something different?
Top tip
If you want to overpay on a repayment mortgage, make sure the money goes towards paying off the overall balance, not just the interest. When you speak to your lender, tell them you want to use overpayments to reduce the term of your mortgage.
If there are no penalties, overpaying could help you save money in the long run. And you don’t have to overpay a large amount each time. Just £50 or £100 more each month could help reduce the interest you pay and shorten the length of your mortgage.
Should I overpay my mortgage or save?
To see if you’re better off overpaying your mortgage or saving the money, you need to work out if your mortgage rate is higher than the rate on your savings, after tax.
You’ll also need to take account of your overall financial situation too – for example you may be wise to instead set up an emergency fund if you haven’t already got one. And you should also consider paying off any debts with a higher interest rate first, for example credit card debt.
Once these are paid off you could consider switching the money you had been using for them towards mortgage overpayments.
Remember that if you’re not earning enough interest on your savings, you could be better off switching your savings account.
Should I overpay on my mortgage or reduce its term?
If you can, overpay rather than ask your lender to reduce the length of your mortgage, as this potentially offers you more flexibility with less risk.
Both options have the same outcome – higher monthly payments, less interest and a shorter mortgage term. But if you’re locked into an agreement to pay regular higher monthly payments, you might find yourself struggling if your circumstances change or you’re on a variable rate and the interest rates rise.
By overpaying you can vary the amount on top of your set payments each month or even stop overpaying for a time if you need to, while your account is still overpaid.
Should I overpay monthly or as a lump sum?
Whether you overpay the mortgage monthly or use a lump sum will depend on your own circumstances and what your lender prefers.
Deciding on a set amount you're going to overpay regularly could help you budget. And if things change you can stop at any time.
A lump sum could save you money on interest and clear your mortgage faster, but you won’t be able to get your hands on the money once you’ve paid it over unless you remortgage.
There may be some situations where you unexpectedly come into a lump sum – like receiving an inheritance – and putting this straight into your mortgage could be a good thing to do with your windfall.
Some people compromise and pay the extra into a savings account – preferably a high-interest regular savings account – and then (if they haven’t needed the money for an emergency) pay it as a lump sum into their mortgage.
This gives additional flexibility but will mean that you lose out on the difference between the interest being paid on the mortgage and coming in on the savings.
What are the advantages of overpaying on your mortgage?
If you can afford it, there are a variety of benefits of overpaying your mortgage:
You’ll pay less overall on your mortgage
By overpaying you can reduce the capital you owe on your home, which in turn will mean you have to pay less interest, cutting the amount you’ll have to pay back over the lifetime of your mortgage.
Also, overpaying when interest rates are low means you’ll have a smaller mortgage if there are higher interest rates in the future.
You can pay your mortgage off earlier
You can become mortgage-free sooner, offering you more freedom and the chance to do something else with the money that would otherwise be spent on your mortgage.
Even paying just an additional very small amount regularly could shave months of your mortgage term and potentially save you more on interest than you’d gain by putting your money into a low-yield savings account.
The loan to value ratio on your home will improve
By paying off the capital you’ll begin to own a larger proportion of your own home, making the loan to value more favourable to you. If you decide to remortgage at a later date, it’s possible you’ll get a better deal as you’ll have more equity in your home.
It can be better financially than saving
If savings rates are low, you’ll benefit from the difference between the interest you save on your mortgage and what you’d get from your savings account.
However, if the interest rate on your savings account exceeds the interest rate you pay on your mortgage you might be better off keeping your money where it is.
What are the disadvantages of overpaying on your mortgage?
Overpaying your mortgage can have some disadvantages too, for example:
You might have to pay early repayment charges or penalties
Some mortgage lenders will apply early repayment charges, so check your terms carefully to make sure you won’t face a penalty for clearing your mortgage debt sooner.
You may lose out by not paying other outstanding debts first
It’s worth considering any other debts you may have and how much you pay in interest on those. If you have any unsecured credit, like high-interest credit cards or loans, they’ll usually come with a higher rate of interest than a mortgage.
If you pay off the debt with a higher interest rate first, before you make any overpayments on your mortgage, it could help you save more overall. But don't let debts build up again.
You could overstretch yourself
It’s important to bear in mind that you’ll lose the safety net of any savings you use to overpay your mortgage. Mortgage lenders won't offer refunds on overpayments.
Before you decide to overpay on your mortgage make sure you’ve got a rainy day fund that you can access at short notice if you need to.
There are some flexible mortgages available, however. For example, offset mortgages, current account mortgages or 'borrow-back' mortgages will let you overpay, then withdraw the money again at a later date, without having to pay a penalty.
How do I overpay on my mortgage?
How to overpay your mortgage depends on whether it’s a lump sum or a regular overpayment. Give your mortgage lender a call to discuss your repayment options. They’ll be able to give you advice specific to your mortgage and confirm any limits. And if you want to start overpaying by a set amount each month, they should be able to help you set up a standing order.
To maximise your savings, make sure your lender is aware that you want to overpay to reduce the length of your term by repaying capital. Otherwise, they might assume you want to pay off some of next month’s payment in advance – which is an option on some mortgage deals but won’t save you much in the long run.
You need to clarify that any overpayments are going towards paying off your overall balance and not just the interest (which won’t reduce your mortgage term), as lenders won’t do this automatically.
Need mortgage advice?
Mortgages are complex financial products, so it’s important to take your time when searching and to consider all your options.
We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free mortgage advice. Get in touch with one of its expert advisers here.
Go to L&C Mortgages**London & Country Mortgages Ltd (L&C) is a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, which is authorised and regulated by the Financial Conduct Authority (143002). L&C is not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria.
L&C will not charge you a broker fee should you decide to proceed with a mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
FAQs
How will overpaying on my mortgage affect my loan to value ratio?
If you overpay your mortgage, you will grow the share of your home that you own faster – increasing the equity you hold in your property (and decreasing your loan-to-value ratio, or LTV).
If you have a lower LTV, mortgage lenders will see you as a lower risk when you remortgage and could potentially offer you a lower rate of interest.
For example, if your loan to value is 80% you may be offered a lower rate than if the LTV was 90%. This could further reduce your monthly payments allowing you to overpay more in future.
Should I make an overpayment on my mortgage or put money in a savings account?
If the interest you earn on your savings account is higher than the interest you pay on your mortgage, it might be more beneficial to save. However, if your mortgage rate is higher, then paying off more of the mortgage debt might make more sense.
The logic is that it’s better to save paying £3 in interest than to earn £2 in interest. And you’ll also have the added benefit of reducing the overall interest you pay and shortening your mortgage term.
But before you consider overpaying your mortgage, make sure you have some emergency savings that could cover your outgoings for three to six months, or cover an emergency such as an expensive home repair.
When is the best time to overpay on my mortgage?
Ideally, you want to time your overpayments before the interest is calculated, to boost the amount you save. You should check with your lender to see when they re-evaluate interest rates. If the interest is calculated daily, then it makes no difference when you overpay. But if it’s applied monthly, quarterly or even annually, you should aim to overpay just before.
If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.
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With over 10 years’ experience writing, editing and managing content, Emma has written and edited for some of Australia’s leading financial comparison brands, including Savings.com.au, Your Investment Property Magazine, and Your Mortgage.
Ele Clark is an award-winning editor who has held leadership roles at Which? and news-stand publications in London and Dubai. She’s appeared across the press and media, including BBC’s Panorama. With almost 20 years’ experience in personal finance, insurance and consumer journalism, she leads a talented team at Compare the Market, creating insightful, accessible content to help people make informed financial decisions.
Sajni is passionate about finding money products to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.
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